Why GM Should Be Your Preferred Choice in the Automobile Industry!

The automobile giant of America General Motors (NYSE:GM) is currently trading at a discount of approximately of 20% to its 52-week high of around $41 and has therefore sparked interest in the investor community. The automobile colossus which recently created positive media hype by investing in a bike-sharing program for its 19,000 employees on its sprawling technical center campus in a Detroit suburb. The company said the bike share program is a first for a U.S. automaker. It will be managed by Zagster, a private bike-sharing company that has developed similar programs for other businesses.

Solid performance

In July, the company posted results for the second quarter wherein it declared a net income of $0.2 billion or $0.11 per diluted share. Strong core operating performance during the quarter was offset by a pretax net loss from special items of $1.3 billion, or $(0.47) per diluted share, and costs of $1.2 billion pre-tax primarily for recall-related repairs, or $(0.44) per diluted share. Net revenue in the second quarter of 2014 was $39.6 billion, compared to $39.1 billion in the second quarter of 2013. In the first six months of 2014, revenue rose to $77 billion, up from $76 billion in the same period a year ago.

As with other American companies, General Motors has also come under the scanner of the Chinese Government after the authorities in China have alleged that GM violated the antitrust laws of the country. The Chinese locals have put forward complaints about high prices being charged for imported vehicles and vehicle parts. In China, GM operates through a joint venture with the Shanghai Automotive Industries under the banner “Shanghai General Motors” and sells GM’s Buick, Cadillac and Chevrolet cars. It is important to note that after North America, the Chinese market is the largest contributor to GM’s revenue and therefore the developments in China need to be considered.

China became the leading market for General Motors in 2010. Based on volume, General Motors is the second biggest auto company in China after Volkswagen. GM has a huge base in the U.S., but its sales in China have significantly increased over the past few years, surpassing sales figures in the U.S. This trend could be seen from sales figures achieved in the first half of 2014. Sales for GM vehicles in China rose by 10.5% compared to the prior year, totalling 1.73 million vehicles whereas comps for U.S. sales improved by 2.8% in the same time period, totalling 1.46 million vehicles.

Chinese consumers are charged excessively high prices for cars by foreign auto companies. These automakers claim that taxes are the cause for higher prices. The Chinese government has levied a 25% tax on imports, a 17% tax on purchases and also a consumption tax based on the size of the engine. As such, these automakers shift the burden of these taxes onto the consumers by charging higher prices. The probe launched by Chinese Government will however provide a breather to the locals as it might reduce the cost of auto parts which can come around to 40% of the price of the car. it is likely that revenue generated from the sale of auto parts would likely decrease. The upside is seen with more affordable repair services, offered with the legal parts, will now be accessible for customers, in turn driving service revenue higher. Unfortunately, there is no definite change that can be expected from the imposition of the anti-trust probes.

A word on valuation

Well, I started this article with a comment on GM’s current trading price because I wanted to talk a bit about the company’s valuation and if it is justified. As of now, GM is trading at a forward multiple of 7.7 and has a dividend yield of around 3.45%, which is quite impressive considering the fact that it is had to spend a fortune in recall expenses and compensation claims.

If we were to do a brief study of GM’s yield and valuation against its main competitor Ford (FORD) then GM also has a superior dividend yield of 3.44%, as opposed to Ford's yield of 2.87%. Also, Ford’s forward multiple of around 9.02 makes it a pricier affair than GM. General Motors is expected to earn $2.72 in earnings-per-share for the current year and $4.53 in EPS for 2015, which puts its pay-out ratio at roughly 44% and forward pay-out ratio at about 26.5%.This indicates that there is room for consistent increases in the performance of GM and for the price these shares are trading currently, the prospects look bright.

Takeaway

General Motors is a company that is known for its innovation ability and efficient cost management system. In fact, as per a recent news report, the company is developing a car in which it will install motion sensors so that the driver’s eyes are on the road. At the present valuation, GM is definitely your ideal pick in the industry.

About the author:

Riddhi Kharkia

A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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